G.R. No. 93048. March 3, 1994.

*
BATAAN CIGAR AND CIGARETTE FACTORY, INC., petitioner,
vs.
THE COURT OF APPEALS and STATE INVESTMENT HOUSE, INC., respondents.

Doctrine:
Section 59 of the NIL further states that every holder is deemed prima facie a holder in due
course. However, when it is shown that the title of any person who has negotiated the
instrument was defective, the burden is on the holder to prove that he or some person under
whom he claims, acquired the title as holder in due course.

Facts:
Bataan Cigar and Cigarette Factory, Inc., a corporation involved in the manufacturing of
cigarettes, engaged one of its suppliers, King Tim Pua George (referred as George King), to
deliver 2,000 bales (bundles) of tobacco leaf. In consideration of such, Bataan Cigars issued
post-dated crossed checks. Despite George King’s failure to deliver in accordance with the
earlier agreement plus its reliance to the supplier’s representation to complete the deliveries
within 3 months, Bataan Cigars agreed to purchase additional bundles of tabacco leaf.

However, during these times, George King was simultaneously dealing with State Investment
House Inc., where he sold to SIHI several checks at a discounted price, which was drawn by
Bataan Cigars naming George King as the payee.

When George King failed to deliver the bundles of tobacco leaf, Bataan Cigars issued a stop
payment order on all checks payable to George King, including those which were sold to SIHI.

SIHI extended efforts to collect from Bataan Cigars but such failed thus, it instituted an action
for collection.

Issue:
Whether SIHI, a second indorser, and holder of crossed checks, is a holder in due course, to be
able to collect from the drawer, Bataan Cigar.

Ruling:
NO. SIHI is not a holder in due course.

The Negotiable Instruments Law states what constitutes a holder in due course, thus:
“Sec. 52—A holder in due course is a holder who has taken the instrument under the following
conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it had
been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.”
Section 59 of the NIL further states that every holder is deemed prima facie a holder in due
course. However, when it is shown that the title of any person who has negotiated the
instrument was defective, the burden is on the holder to prove that he or some person under
whom he claims, acquired the title as holder in due course.

In the case State Investment House Inc. v. IAC, the SC made a disclosure on the effects of
crossing of checks.

A check is defined by law as a bill of exchange drawn on a bank payable on demand. There are
a variety of checks, the more popular of which are the memorandum check, cashier’s check,
traveler’s check and crossed check. Crossed check is one where two parallel lines are drawn
across its face or across a corner thereof. It may be crossed generally or specially.

A check is crossed specially when the name of a particular banker or a company is written
between the parallel lines drawn. It is crossed generally when only the words “and company”
are written or nothing is written at all between the parallel lines. It may be issued so that
presentment can be made only by a bank. Veritably the Negotiable Instruments Law (NIL) does
not mention “crossed checks,” although Article 541 of the Code of Commerce refers to such
instruments.

In the Philippine business setting, however, we used to be beset with bouncing checks, forging
of checks, and so forth that banks have become quite guarded in encashing checks, particularly
those which name a specific payee. Unless one is a valued client, a bank will not even accept
second indorsements on checks.

In order to preserve the credit worthiness of checks, jurisprudence has pronounced that
crossing of a check should have the following effects:
(a) the check may not be encashed but only deposited in the bank;
(b) the check may be negotiated only once—to one who has an account with a bank;
(c) and the act of crossing the check serves as warning to the holder that the check has
been issued for a definite purpose so that he must inquire if he has received the check
pursuant to that purpose, otherwise, he is not a holder in due course.

It is then settled that crossing of checks should put the holder on inquiry and upon him
devolves the duty to ascertain the indorser’s title to the check or the nature of his possession.
Failing in this respect, the holder is declared guilty of gross negligence amounting to legal
absence of good faith, contrary to Sec. 52(c) of the Negotiable Instruments Law, and as such
the consensus of authority is to the effect that the holder of the check is not a holder in due
course.

In the present case, BCCFIs defense in stopping payment is as good to SIHI as it is to George
King. Because, really, the checks were issued with the intention that George King would supply
BCCFI with the bales of tobacco leaf. There being failure of consideration, SIHI is not a holder
in due course. Consequently, BCCFI cannot be obliged to pay the checks.
The foregoing does not mean, however, that respondent could not recover from the checks.
The only disadvantage of a holder who is not a holder in due course is that the instrument is
subject to defenses as if it were non-negotiable. Hence, respondent can collect from the
immediate indorser, in this case, George King.

GR No. L-33549. January 31, 1978.

BANCO ATLANTICO, petitioner, vs. AUDITOR GENERAL, respondent.

Doctrine:

Facts:
Banco Atlantico, the petitioner is a commercial bank doing business in Madrid, Spain. On
October 31, 1968, Virginia Boncan, then the Finance Officer of the Philippine Embassy in
Madrid, Spain, negotiated with Banco Atlantico, a Philippine Embassy check signed by Luis M.
Gonzales, its ambassador and by said Virginia Boncan as Finance Officer. The said check was
payable to Azucena Pace and drawn against Philippine National Bank branch in New York, USA.

The said check was endorsed by Azucena Pace and Virginia Boncan where Banco Atlantico,
without clearing the check with PNB in New York, paid the full amount of the check to Boncan.
Later, two (2) other checks were presented for payment, this time payable to Boncan, and
again, Banco Atlantico paid the amount without clearing.

When Banco Atlantico, through its collecting bank in New York, presented the checks for
acceptance and payment, such was dishonored by non-acceptance on the ground that the
drawer made a stop payment order. Boncan and the Philippine Embassy in Madrid refused to
pay Banco Atlantico the amounts of the checks.

Issue:
Whether the payments of the subject checks without clearing them first with the drawee bank
constitutes an actual notice of defective title and therefore, such is not considered a holder in
due course which defeat its right to collect

Ruling:
Yes. Banco Atlantico has no right of payment against any party for the said checks.

Banco Atlantico paid the amounts of the three (3) checks in question to Boncan without
previously clearing the said checks with the drawee bank, PNB in New York. This is contrary to
normal or ordinary banking practice specially so where the drawee bank is a foreign bank and
the amounts involved were large. The drawer of the aforementioned checks was not even a
client of the petitioner.
There is a showing that Virginia Boncan enjoyed special treatment from the employees and
chiefs of the petitioner’s foreign department. It was probably because of this special relationship
that the petitioner, in disregard of the elementary principles that should attend banking
transactions, cashed the three (3) checks in question without prior clearances from the drawee
bank.

Thus, the Philippine Embassy in Madrid, as drawer of the three (3) checks in question, cannot
be held liable. It is apparent that the said three (3) checks were fraudulently altered by Virginia
Boncan as to their amounts and, therefore, wholly inoperative.